Selecting exceptional Balanced Scorecard indicators is part art and part science. The key to success in both is to start with a good definition of the strategic objective you are trying to measure.
A good strategic objective definition describes what the strategic objective looks like in action including what is and isn’t included. It also outlines why the strategic objective is important including the value it contributes to your organization and delivers to your customers or stakeholders, and how it enables the achievement of desired business and customer or stakeholder outcomes, your mission, and your vision.
In addition, clear strategic objective definitions provide a critical guide for your employees as they focus on executing your strategy, and, important for this discussion, they provide a touchstone for determining your Balanced Scorecard indicators.
I recommend that everyone wishing to implement a Balanced Scorecard follow a rigorous five-step indicator identification process that looks like this:
Let’s take a closer look at each step:
Identify KEY Macro Processes Aligned with the SO (Strategic Objective)
The execution of the strategic objectives in your strategy is achieved through the completion of work – usually a combination of business processes and strategic projects. Based on the definition of each strategic objective, select the top 2 - 3 core business processes that best support the execution of the strategic objective you are considering.
Identify Possible Process Inputs, In-processes Measures, Outputs, and Outcomes
For each process identified for a strategic objective, brainstorm and list possible input measures (think about what triggers the process to run), in-process measures (things you could observe and measure while the process is running), output measures (think about what you have immediately after the process has run), and outcome measures (think about the benefits achieved through the completion of the process and/or the production of the process’ outputs).
Review Existing Indicators
Apply the “existing indicator” filter to your brainstormed list. That is, determine which of your candidate indicators your organization actually measures today. Leveraging existing measures allows your organization to build its capabilities in performance management conversations rather than in Balanced Scorecard creation and data collection activities. Use the “existing indicator” filter to shorten your list of candidate indicators.
Select SMART Preliminary Indicators
Apply the “SMART filter” to your indicator short list where SMART stands for:
S = specific and simple: Determine how well a candidate indicator relates to the strategic objective based on its definition. This helps ensure that the indicators you use on your Balanced Scorecard are relevant and effective for strategy management. Simple indicators are easy to calculate, understand, and analyze. Most people find it hard to respond to indicators with multiple components and complex calculations when results are performing below expectations.
M = measureable: This is an extension of the “existing indicator filter”. Look at what you are already measuring today and consider elevating the good candidates to indicator status. Another option is to take two measures that you currently use and combine them in a different way to create a completely new indicator.
A = available: A strong candidate indicator provides results within 3 – 5 days after the close of your measurement period. Having to wait weeks for results means that you will be managing your strategy with old information and, in these days of rapid change, stale results do you no favors.
R = reliable: When you are measuring the vital signs of your company, you want to use indicators that will pick up changes as soon as they happen. Good indicators let you know that a change has in fact occurred, giving you the option to respond based on your assessment of the nature of the change.
T = timely: Good indicators give you information to look at on a regular basis – usually monthly or quarterly. The ideal measurement/reporting frequency will depend on what you are measuring, why you are measuring it, and the amount of time required to see the impact of corrective action on results. The goal is to select a measurement frequency that maximizes your ability to manage your strategy effectively.
Many organizations add additional criteria to their list (e.g. validity, data quality, etc.). While the list above is a solid set of criteria, there is nothing to stop your organization from adding more items to your list.
Make Final Indicator Recommendations/Selections
Your goal is to select 1 or 2 (MAXIMUM) indicators for each strategic objective on your strategy map. I generally suggest that you apply the SMART technical criteria first when assembling your recommended indicator(s) list – this is the science part of the indicator selection process.
However, the next step is the art part of selecting your Balanced Scorecard indicators - answer three questions that form the critical test you must apply to determine whether a candidate indicator should “make the cut” onto your Balanced Scorecard
The first question to ask is: “What behavior will this indicator drive?” Recall that each strategic objective definition outlines what the strategic objective looks like in action. Putting a strategic objective into action requires specific organizational behaviors. By selecting indicators that drive the behaviors necessary to execute the strategic objective as it’s defined AND provide insight into strategic objective health, you will ensure that your strategy is moving forward in the right direction. Sometimes you will be surprised by the behavior an indicator produces! So, when considering a candidate indicator, think through what employee, customer, and/or stakeholder behavior this measurement might drive and explore whether that behavior will move the strategic objective forward in the desired way. If the answers to these questions aren’t as positive as you would like, I would recommend looking for another indicator.
Next, ask “What conversations will this indicator enable?” The key to effective strategy management is organizational conversations - your Balanced Scorecard results, including the data and commentary provided for each indicator, should set the scene for meaningful conversations about the health and progress of your strategic objectives and, ultimately, your entire strategy. A strong indicator helps people across your organization have solid discussions about what is and isn’t working in your organization, the inter-relationships and impacts across your organization and within your value chain, and whether your business strategy is doing what you expect and need it to do. Be sure to select indicators that will elevate the quality of the strategy conversations at all levels of your organization.
Finally, be sure to ask “Will this indicator drive action if required?” Strategy, and its execution, is usually achieved through organizational change. Because achieving your mission is a never ending goal, you will always be striving to do something more/different/better to get where you ultimately want to go. Your Balanced Scorecard is a key feedback mechanism that tells you how well you are progressing and sometimes things don’t progress as planned. When this happens, indicator performance results will give you an early warning sign. Now, we all know that indicators are not diagnostic – you need to do more investigation to identify and understand the root cause problem. The key to turning indicator and strategy underperformance around is resolving root cause issues. A high value indicator will enable you to do your root cause detective work and then take appropriate action to eliminate critical issues that are negatively impacting the health of its strategic objective. Indicators that do not help you take action that produces meaningful organizational change should be left off of your Balanced Scorecard.
Crafting a robust Balanced Scorecard is BOTH an art and a science. The science part relies on a solid process and a set of selection criteria which together help ensure that you identify quality candidate indicators. Applying the art side of the indicator selection process by asking the three critical questions outlined above ensures that only high value indicators appear on your final Balanced Scorecard.
About the author
Sandy Richardson, B.Sc., M.Ed.
Sandy Richardson is the President of JETrichardson, and author of the book “Business Results Revolution: 3 Critical Questions and the Conversations that Transform Business Performance Every Day” (now available at www.businessresultsrevolution.com). Sandy is a business performance management professional who believes that every organization deserves to be the best that it can be and has a true passion for working with visionary business leaders and engaged employees to achieve their business performance objectives.
Sandy has over 20 years of business performance leadership experience, including 7 years of hands-on strategy creation and execution, and balanced scorecard management leadership at companies such as the Canada Life Assurance Company and Barrick Gold Corp, and 12 years as a strategic planning and strategy execution advisor in both the public and private sectors. She is currently focused on helping business leaders and their teams achieve exceptional business performance results by helping them pinpoint and overcome their strategy execution challenges quickly, effectively, and permanently.
Sandy is a frequent conference speaker and regular blogger, commenting on the process and benefits of strategy execution excellence and building a strategy-focused organization.
Visit Sandy on the web at www.jetrichardson.ca